News from Greece keeps getting worse. The recession is deeper than expected, social tensions are rising and the government says its 2011 deficit target will be hard to meet. Many analysts surely feel vindicated; they have long argued that Greece’s program will fail. Yet they were and remain wrong. Greece faces a political and economic crisis—debt is only a symptom, and there is no point in treating the symptom but not the disease. For that, Greece needs to keep on its current path.
The case against Greece is simple. When Athens received a bailout in May 2010, its debt over GDP ratio was set to peak at 149 percent in 2012–2013. Now it will reach 172 percent due to a revision in the numbers, a deeper recession and increased support for Greek banks. Meanwhile, GDP in Q2 2011 fell by 6.9 percent, bringing the country back to its 2004 GDP levels. Evangelos Venizelos, the finance minister, admitted that GDP could fall by more than 4.5 percent this year, the fourth revision from an initial -3 percent. It will be a decade before Greece recovers to its precrisis GDP and perhaps longer before debt crosses below the psychological threshold of 100 percent of GDP.
Critics say that the current approach—austerity, bailouts and a partial, voluntary restructuring— merely throws good money after bad. It does nothing to help Greece or to calm markets. Athens has three (overlapping) options: it can default, it can leave the euro to devalue its way to growth or it can get Europe to guarantee its debt. But these solutions are no solutions at all. They misdiagnose the problem—they want to give aspirin to someone with a broken tooth. Aspirin helps, but Greece needs a dentist.
The dysfunctions that ail the Greek economy are well known by now; high salaries for public-sector employees with lifelong tenure and zero accountability; loss-making state-owned companies; under-utilized state assets; hostility to entrepreneurship; tax evasion; restricted competition in “closed” professions; corruption in public and private life. Yet when it comes to offering a cure, the mantra “default and leave the Eurozone” is woefully inadequate. How can default and a new currency possibly solve any of these problems? For all the ink wasted on the Greek crisis, outsiders—and many Greek— still misunderstand what has happened and why.
There is no doubt that Greece’s problems were born in the 1980s. In 1980, Greece’s debt was 22 percent of GDP; by 1993, it had risen to 98 percent, where it hovered (more or less) before jumping again in the current crisis. The deterioration in public finances coincided with two other trends. The first was increased statism. In 1980, the state spent 24 percent of the country’s GDP; by 1990, that number had risen to 45 percent before peaking at 51 percent in 2009. The second was stagnation. The 8 percent real per capita growth of the 1960s and the 4.6 percent growth of the 1970s (oil shocks included) turned into almost zero in the 1980s. In 1978, as Greece was about to join the European Economic Community, its per capita GDP was 5 percent below the European average on a PPP basis. By 2000, the income gap was 30 percent.
These facts are well understood. Less well understood is why this happened. Simply put, the 1980s were a period where the state spent money to correct political ills. The goal was to heal a society divided by civil war and by three decades of internal conflict (including a seven-year military junta) by spending money on the losing side of the conflict and absorbing it into the mainstream. The settling of violent clashes between the right and the left that has plagued Greece since World War II came with the high price tag of a ruined economy.
Why does this matter? Greece’s problems—a massive state, an anemic private sector, lax enforcement—are symptoms of weak legitimacy. To correct them, the state needs legitimacy without relying so heavily on patronage. This alone underscores the enormity of the challenge ahead. Moreover, the diagnosis offered above is hardly obvious to most Greeks. This is where many observers get Greece wrong: if the country had defaulted in May 2010, the Greek public, according to polls, would have merely blamed politicians, speculators, foreign banks and the bigger European countries for that crash. It would have blamed everyone, in other words, but itself for the crisis, leaving little hope that default would have been cathartic.
Instead, Greeks need to see that this is not crisis of capitalism, nor one caused by Lehman Brothers or foreign banks. This is a homegrown disaster, nudged by the turmoil in global finance. It is a crisis that marks the failure of the political and economic model of the last three decades. Seen in this light, “success” has a very different meaning. Outsiders fixate on certain metrics: debt, budget deficits and economic growth. This is inevitable and somewhat proper. But the battle for Greece is broader; it is about how Greeks will interpret the current crisis and how they will relate to their government from now on.
There is progress already. The share of Greeks willing to accept part of the blame has risen over the past few months, although it is still just 52 percent. Taboos such as lifelong tenure in the public sector, privatizations and onerous restrictions in the private sector are increasingly seen as indefensible. The Greek government is slowly fixing these absurdities. The cry for “justice”— however vague—shows that the Greek public thirsts for accountability. Should this happen, an immense amount of public anger would be released and a new social pact could be forged.
The old system is being dismantled. How ironic that the ruling PASOK party, which expanded clientelism in the 1980s, now needs to tear it apart. To succeed, it has to move against its base. It is not clear that it can do this, but with a contracting economy and a shrinking state patronage is no longer an option; by default, the old ways are over. What comes next is unclear. The populist right is gaining ground. Xenophobia is rising in a country that took in many immigrants without a plan to absorb them. Society is tense, and violence is never too far.
Yet there is hope. Transitions are uncertain—they unsettle and they provoke. In a way, Greece needs unsettling. It is a pity that change must come under such difficult circumstances, with so much at stake and with potentially explosive results if things go wrong. But sadly, change would have come no other way. Europe is vested in Greece’s reform program to bring back a vibrancy that the country had not too long ago. It is a huge task and one that will take time. But it is a worthwhile cause. And it is against that benchmark of change, rather than debt levels, that one should judge success in Greece.